Friday, March 07, 2003

Timely parting ways with IMF

(Jakarta Post, 7 March) Last Thursday a coalition of economists reportedly stated that Indonesia's economic growth would return to the pre-crisis level, if only we would part with the International Monetary Fund (IMF) immediately. Their scenario predicted a 6 percent to 7 percent post-IMF growth in 2005, and total domestic revenue of Rp 524 trillion in the next three years.

With such numbers, no sensible economist would want the IMF consultants around. So, now that we have the economic justification, it's time send them packing, right?

Alas, the devil is in the details. Even without discussing the plausibility of the numbers, a careful scrutiny of the plan (Media Indonesia, Feb. 27-Feb. 28, March 1) suggests two important omissions. These omissions put into question the effectiveness of the economic argument, and hence, the conclusion that the IMF must go immediately.

For one, there is no such thing as a free lunch. Yet, the plan's description of the post-IMF earnings -- increased revenue from taxation, natural resources, etc. -- falls short of mentioning the price tags for each initiative. Without the price tags, there is no way to know whether the scenario, which calls for a bigger government, is realistic or sustainable under our post-IMF, post-Paris Club, liquidity (and budget) constraints.

The plan's second omission -- a crucial one, as it is the raison d'etre for the scenario -- would have stood as a convincing argument against IMF involvement.

Its authors argued that the IMF programs had effectively straitjacketed Indonesia's policymakers, disabling them from implementing what was necessary for an accelerated growth. After such a bold assertion, one would next expect a set of innovative policy recommendations that would have been ruled out by the IMF programs.

No such recommendations were provided. Aside from the debt restructuring recommendation -- a financial engineering effort that is unlikely to solve problems -- most of their recommendations can be found in the IMF's letter of intent (LOI) at one time or another.

Why, then, have we not seen these policies implemented? Perhaps, it's a matter of price.

The more important reason, however, which suggests the second problem with their argument, is the fact that a strong government is elusive in our post-Soeharto era.

Their scenario's weakest aspect is its assumptions. Its success is conveniently based on assumptions of "a strong government" and "democratic consolidation". This is wishful thinking -- at least, until the next change of government. The recent fuel and electricity subsidies debacle suggests that "strong government" is currently an oxymoron.

Always insecure about its political support, the government of Megawati Soekarnoputri will avoid making more unpopular decisions in this election year, despite their necessity.

With this political reality, the real cost of leaving the IMF program now (instead of, say, after the elections next year) is the government's economic credibility.

Domestically, the IMF can often act as a "scapegoat" that allows policymakers to make difficult, yet necessary, rational economic decisions in an election year. Internationally, its presence is perceived by investors as a reasonable restraint to the government's tendency towards populist, yet economically unsound, policies throughout the election year.

This aspect, investor confidence, is critical for growth. Most other macroeconomic indicators have shown healthy growth.

If the immediate departure of the IMF is perceived as the departure of prudence, we risk further delays in improving investment. This will have a negative effect on growth.

As such, the straitjacket argument does not hold water. On the contrary, the IMF actually extends the range of policies available to our weak, and some might add incompetent, government. We still the IMF -- both as a technical assistant and a policy instrument.

Self-reliance is a noble idea. Yet we need to acknowledge our strengths and weaknesses, and work on our weaknesses by any means -- including the use of foreign instruments like the IMF, if necessary. True, we should not let the IMF overstay its welcome; yet, sending it home when we can still make use of it is, well, wasteful.

A decision on the timely parting with the IMF must be based on an analysis founded, neither on wishful thinking nor political expediency, but on economic and political realities.

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About Me

I am a student in economics. This is not to say that I'm only interested in money supply, interest rates, or exchange rates. We care about all of the things that non-economists care about - we just see them in a unique way. I am also an Indonesian - which also doesn't mean I only care about Indonesian affairs. I was just born that way.